Inheritance tax: The rule of 7 years.


An access to information request from the Telegraph identified that since 2016, HMRC has discovered that gifts worth more than £ 600million have been found to be taxable at a rate of 40%. While there is no denying that making lifetime gifts is a great tool for mitigating an individual’s inheritance tax (IHT), it is important to keep the following rules in mind before embarking on this aspect. tax planning.

This note develops certain issues addressed in an article on our website relating to inheritance rights and donations. In particular by exploring the 7-year Rule and the rules surrounding gifts with reserve of profit.

7 year rule

Most gifts (except those in most forms of trust) are not subject to the IHT when made, regardless of their value. In addition, if you survive making these gifts for 7 years, they will be exempt from the IHT. These types of gifts are known as potentially exempt transfers (PET). The reason they are known as “potentially” is that if you do not survive 7 years from the date of donation, the donation will be submitted to the IHT.

The amount of tax charged depends on how long you survive from the date the donation was made. The longer you survive after donating, the lower the IHT, provided you survive for at least three years. This is known as “taper relief” and is provided for by S7 (4) of the Inheritance Tax Act 1984.

The way in which the progressive relief is calculated is shown in the table below, but it is important to note that the progressive relief applies to the level of IHT due and not to the donation:

Period between the date of donation and the date of death Relief rate (applied to the amount of the IHT)
0-3 years 0%
3-4 years 20%
4-5 years 40%
5-6 years 60%
6-7 years 80%
7 years and over 100%

For example, if you donate £ 500,000 and die within three years, the IHT due on the donation (ignoring any other allowance except the zero rate bracket) would be £ 70,000. If you survive more than three years the IHT is £ 56,000. You should keep in mind that tax liability rests with the recipient of the gift, not your estate.

Gift with a benefit reservation

In the spirit above, for a lifetime gift to be fully effective, at least from the point of view of the IHT, you must not violate article 102 of the 1986 finance law. This law confirms that you must sell the property without keeping any advantage. or the enjoyment of the given property. If you do so, the donation will be considered by HMRC as a GROB (donation with profit reserve) and will remain part of your estate for the purposes of calculating the IHT.

Interestingly, the overwhelming majority of giveaways that turned out to be property-related GROBs. The typical situation would be where a parent transfers legal title to their property on behalf of their children who live elsewhere. The parent then continues to live in the property without rent until the date of his death. In this scenario, it will certainly be the case that this “gift” will be considered a GROB.

Alternatively, if the parent in the above scenario leaves the property or pays their child full market rent, it will be a PET. Provided the parent survives 7 years from the date of the move or the date the rent started being paid, the value of the property will be exempt from IHT.

The law stipulates that the property must be valued with the “virtual exclusion” of the donor. While there may be room for a minor reserve of perks, such as social visits to the property or a temporary stay, it is important that the donation be made unconditionally.

Giving this type of gift requires expert advice as there are a number of factors to keep in mind.

Talk to our wills, trust and probate specialists.

If you have any questions regarding inheritance tax, please contact the BWI Wills, Trusts and Probate team on 01895 207 910 or email [email protected]

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